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Big news from India.

On July 23, Indian Finance Minister Nirmala Sitharaman released the latest fiscal budget, which included a series of measures affecting domestic and international markets, including expanding infrastructure, reducing gold import tariffs, and raising stock transaction taxes.

Nirmala Sitharaman (Source: Indian Ministry of Finance official website)

Reduce deficit and expand infrastructure

This is the seventh fiscal budget released by Sitharaman during his tenure and the first fiscal budget released by Indian Prime Minister Modi after his re-election, reflecting Modi's economic vision of seeking to balance fiscal prudence. Overall, the focus of this federal budget is to support consumption by increasing allocations to the rural economy, tax reforms, infrastructure construction, promoting local manufacturing, creating jobs and skills, and increasing production-linked incentives (PLI) allocations for labor-intensive sectors.

Specifically, Sitharaman plans to reduce the fiscal deficit target to 4.9% of GDP, and plans to further reduce it to below 4.5% in the next few years to control the level of government debt. These measures show the government's emphasis on fiscal discipline after its re-election. Although the market's initial reaction to the scale of borrowing has led to a decline in Indian bond prices, experts generally believe that the overall budget reflects a positive fiscal prudence, and it is expected that the market will gradually adapt to the new tax framework and policy orientation.

In terms of infrastructure, Sitharaman said that it will support the development of industry in Gaya, Bihar, on the Amritsar-Kolkata Industrial Corridor. In addition, it will support the construction of road connectivity projects, namely the Patna-Purnia Expressway, the Buxar-Bhagalpur Expressway, the Bodh Gaya-Rajgir-Vaishali-Darbhanga Expressway, and the addition of a two-lane bridge over the Ganges River in Buxar, with a total cost of 2600 billion rupees (about 226 billion yuan). In power projects, including the establishment of a new 2,400-megawatt power plant in Pirpainti, it will cost 2140 billion rupees (about 186 billion yuan).

In addition, the federal government will build new airports, medical colleges and sports infrastructure in Bihar. Sitharaman said additional grants will be provided to support capital investment.

In terms of stimulating consumption, the government will reduce the import tax on gold and silver from 15% to 6%, and the import tax on platinum and palladium from 15.4% to 6.4%. Sitharaman said the purpose is to increase the value added of domestic gold and precious metal jewelry. The increase in India's demand for gold may boost international gold prices, which hit a record high this year, but this may widen India's trade deficit and put pressure on its weak rupee.

Sitharaman also announced an exemption from import duty on 25 key minerals, including lithium, as India explores ways to secure supplies of lithium, a key raw material used in making batteries for electric vehicles.

On the same day, Sitharaman also announced that the basic customs duty (BCD) on mobile phones, mobile phone printed circuit boards (PCBs) and chargers would be reduced from 20% to 15%, effective from July 24. Earlier, Sitharaman pointed out in the investigation report submitted to the parliament that electronic products, including mobile phones, have seen the largest growth in history, with exports to the United States increasing from US$2.2 billion in the previous fiscal year to US$5.7 billion in fiscal 2024. According to the 2023-2024 Economic Survey, Apple assembled 14% of the world's iPhones in India in fiscal 2024, and India's ranking in global electronic product exports rose by 4 places.

Capital market takes drastic measures, stock market fluctuates sharply

It is worth noting that Sitharaman has taken drastic measures to regulate the capital market. She said that in response to the continued surge in the stock market, the government has decided to increase the transaction tax on stocks and derivatives, including raising the tax rate on equity investments held for less than one year from 15% to 20%; and for holdings held for more than one year, the tax rate will also be raised from 10% to 12.5%. In addition, the transaction tax on stock derivatives is also facing an increase, including the securities transaction tax on futures transactions from 0.0125% to 0.02%, and the option transaction tax from 0.0625% to 0.1%.

Some media analysis pointed out that since the trough of the COVID-19 pandemic in 2020, the Indian stock market has risen by more than 200%, mainly driven by the surge in retail investors in the derivatives market, whose trading share has jumped from 2% in 2018 to 41% this year. The nominal trading volume of derivatives in May hit a global record of US$113.60 trillion, which triggered warnings from regulators about the risks of excessive speculation.

As soon as the news came out, the Indian stock market fell. The SENSEX30 index fell 1.5% at one point, the NIFTY small-cap index plummeted more than 5%, and the mid-cap index fell more than 3%. However, market sentiment subsequently calmed down. By the close of trading, the SENSEX30 index only fell slightly by 0.09%.

Tridep Bhattacharya, chief investment officer of Edelweiss Mutual Fund, believes that tax adjustments will have an adverse impact on the stock market in the short term, but in the long run they will help guide the market to be more rational and promote long-term investment.

Hundreds of crores of rupees thrown into space

On the same day, Sitharaman also announced that the government will set up a venture capital fund of 100 billion rupees (8.69 billion yuan) for the space sector.

"As we continue to focus on expanding the space economy fivefold over the next 10 years, the Union government will set up a Rs 10,000-crore venture capital fund," Sitharaman said while presenting the budget for the financial year 2024-25.

India has made considerable progress in space exploration in recent years, including the landing of Chandrayaan-3 near the south pole of the moon and the successful launch of its first rocket by space technology startup Agnikul Cosmos. In addition, other space technology startups such as Pixxel, Digantara and Piersight Space have also attracted venture capital.

The Indian Space Association (IsPA), an industry body representing more than 40 space technology startups, praised the move.

“We have earlier advocated for increased fiscal incentives to support the thriving space startups in the country. The announcement of a Rs 10,000 crore venture capital fund is a step forward and addresses the funding challenges faced by these emerging players in this capital-intensive sector. Further, we hope that the proposal to set up 12 industrial parks in India will include the space sector as this will provide a substantial boost to the space and satellite manufacturing industry, which has long been clamoring for a space park,” said AK Bhat, Director General, IsPA.

Editor: Zhu Yumeng

Proofreading: Yao Yuan

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